Commentary

Beggar your pardon, Mr. Bernanke

Commentary: It’s not a currency war, it’s ‘enrich thy neighbor’

AlLewis

DENVER (MarketWatch) — It’s not a currency war. It’s not a race to debase
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It’s not a plan to “beggar thy neighbor.” It’s a plan to “enrich thy neighbor.”

This was Federal Reserve Chairman Ben Bernanke’s response on Monday to complaints that his zero-interest policies are fomenting currency wars around the globe.

Bernanke didn’t use the term “currency war,” opting to call it “a competitive depreciation of exchange rates.” Perhaps, if he were in the armed services, he’d prefer the term “coercive interrogation technique” to “torture.”

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WASHINGTON, DC - MARCH 20: Federal Reserve Board Chairman Ben Bernanke says the Fed isn’t fighting a currency war with the other developed economies.

See, when the Fed and other central banks lower interest rates to nearly zero, it’s not to devalue their respective currencies, making their respective exports more competitive in the global marketplace. It’s to pursue “appropriately expansionary policies to help support recovery and price stability,” he said.

In Bernanke’s mind, when the biggest economic players are strong, it’s a win-win for everyone. “Because stronger growth in each economy confers beneficial spillovers ... these policies are not ‘beggar thy neighbor’ but rather are positive-sum, ‘enrich thy neighbor’ actions,” he said.

What he basically argued is that the more America’s central bank holds down interest rates, the better off the whole world will be, even as several other central banks do the same thing.

This is a bit like saying let’s give all the money to banks and corporations so they can create jobs and growth. And that’s what we’ve been hearing all along in this prolonged period of historically high unemployment and low growth around the globe.

The U.S. economy initially posted a contraction in the fourth quarter of last year that was later revised to a whole tenth of a percent of growth — a mirror image of the same lousy number it initially reported.

Europe, meanwhile, remains in perpetual bailout mode, even as its central banks pursue policies similar to our own Fed. Over the weekend, European banking regulators scrambled together a plan to bail out the Mediterranean island of Cyprus, seizing deposits from wealthy bank depositors along the way.

China’s economy is slumping, too. And Japan? It’s gone from the world’s second-largest economy to a Pacific island that we use to analogize where our own economy is headed.

On the plus side, easy money is re-inflating asset prices. The U.S. real estate market has posted incremental improvements, the U.S. stock market is only slightly below its all-time highs, cars are still selling briskly with cheap financing, companies are reportedly flush with cash, and economists have been brimming with as much optimism as they’ve displayed in the first quarter of every year since the financial crisis began.

The CFOs of some of America’s largest companies are indeed optimistic, according to Deloitte’s survey, but not so optimistic that they’re going to start hiring a lot more people or investing in long-term prospects.

“First the good news,” the survey’s summary page opens, “CFO sentiment and expectations have gotten better over the last two quarters. Now the bad news: Given just how negative the last two quarters were, this is not saying very much.”

In fact, here’s what the survey counts as optimism from the people who see the numbers first: “Economic concerns have largely transitioned from worries about crises/collapse to worries about persisting stagnation.”

CFOs told Deloitte that in this uncertain environment their companies are unlikely to stop hoarding cash. On a list of their top priorities, revenue preservation, cost-cutting and risk management came in first, second and third places, respectively. Investing stock-piled cash and increasing dividends for shareholders came in seventh and ninth.

CFOs, however, largely blamed Washington politics for creating uncertainty over the direction of taxes, budgets and deficit spending. They did not much blame the Fed for enabling this deficit spending with its ongoing purchases of $85 billion of Treasurys and mortgage-backed securities each month.

For CFOs, a cash hoard is a good thing. And now they can rest assured that this is not the result of a currency war. It’s just a bunch of countries deploying “expansionary policies” that “enrich thy neighbor.”

“These policies confer net benefits on the world economy as a whole and should not be confused with zero- or negative-sum policies of trade diversion,” Bernanke said. “In fact, the simultaneous use by several countries of accommodative policy can be mutually reinforcing to the benefit of all.”

He almost makes you wonder why anyone ever charged an interest rate in the first place. All he needs now is the growth to back it up.

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